Perry Mehrling's blog

And heading where?

The deficit in political leadership, both in the US and Europe, is the focus of FT commentary today (see here, here, and here).  It seems clear that another financial crisis is brewing, with its epicentre this time in European sovereign debt problems rather than U.S. subprime mortgages, but policy response has so far been woefully inadequate to the task.

But what would you have them do?  

As John Authers points out, "sovereign credits are no longer available for use.  The rebound of 2009 came once it was clear that governments were prepared to put their own credit behind the troubled banks.  This time around, sovereign credit itself is at issue."   Read more

Updating Hawtrey for the Shadow Banking System

Notwithstanding the U.S. debt deal—which takes default off the table--dollar money markets remain queasy, and longer term capital markets show clear signs of flight to safety, as market rates on the best stuff fall and rate spreads to the next best stuff widen.

Most people seem to be reading this as Wall Street reaction to changed expectations about the fortunes of Main Street.  Economic slowdown in the real economy is coming, probably globally, and consequently there is a premium on safe assets to ride out the storm. Read more

Fed to the Rescue?

The solvency of the U.S. government is not in any serious doubt.  The imminent S&P downgrade of Treasury debt is not about economics; it is about politics.   It is, at root, about the public display of political dysfunction in Congress.

One symptom of this dysfunction is the current brinkmanship over the debt ceiling.  Since there is no real solvency problem, the point seems to be to provoke a liquidity crisis, and to use that crisis to force the other guy to back down.   

On this point, impressively, bi-partisan agreement is the rule. Read more

Grand Bargain at last?

Big doings in Europe on the Greek debt crisis.  As I read it, the new plan has three essential elements. 

First, and essential, is a recognition of losses.  There is to be a bond swap, risky old Greek debt for riskfree new debt of the European Financial Stability Facility.  For debt holders, face values may stay the same, but maturities will be drastically extended (up to 30 years) and interest rates drastically reduced (3.5% is mentioned).   More or less these same terms will then be applied to a refinancing of Greece itself by the EFSF. Read more

Alchemy or Banking?

A recent post of Paul Krugman brings to my attention a few paragraphs near the end of Jamie Galbraith’s testimony to the Deficit Commission which call out for a money view explication.  To my mind, Krugman’s toy model does not really engage the issue, and Galbraith responds to that toy model rather than providing the needed explication.   Both men are really more interested in deficits than in money, but not me, so here goes. Read more

A Monetary Rorschach Test

Is it just an accounting gimmick, or something more?

Ron Paul proposes that the Fed should forgive the $1.6 trillion it is owed by the Treasury, thereby giving the Treasury an additional $1.6 trillion borrowing capacity so as to avoid the looming debt ceiling.  Dean Baker then endorses the proposal, Greg Mankiw comments, and the thing goes viral (see here, here, here).

Viewed as a solution to the debt ceiling problem, the proposal is definitely nothing more than an accounting gimmick.  The point is that the debt of the Fed, the $1.6 trillion of reserves that currently funds the Fed’s holding of Treasury securities, does not count toward the debt ceiling, while the $1.6 trillion that the Treasury owes to the Fed does.  (Fed Balance Sheet is here.) Read more

The view from BIS

Now comes the Annual Report of the Bank for International Settlements, one of the few official agencies to raise alarm about potential crisis before the actual crisis occurred.   As I read their Report, they are raising alarm once again.  We should pay attention. Read more

The Political Economy of Debt

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Liquidity versus Solvency

In response to my last post, Zvi Bodie writes to suggest that I may be simply rephrasing a point that he and Robert Merton made in a series of papers some years ago (the seminal paper is here).   I don’t think so, but the suggestion brings into the foreground the question o Read more

New Thinking about Modigliani-Miller

In the debate over financial reform, one of the major themes has been the need to protect the public purse from the cost of future bailouts by requiring too-big-to-fail banks to hold a larger buffer of private capital. Read more